Disincentives to Work or No Work?

Three major on-going political and economic debates are centered around income inequality, the minimum wage, and the welfare state. Highly interrelated, these debates contain the same theoretical underpinnings. 

• One narrative for income inequality (Mankiw-esque):

People who earn higher incomes deserve it for various reasons; ambition, hard work, ingenuity.  The return they get for being skilled, talented, or educated is fair. We need income inequality to make people work hard. 

• One narrative for abolishing or not raising the minimum wage:

People working minimum wage jobs can better themselves if they got an education.  It isn't a choice to work those jobs, no one is stuck there. 

• One narrative for a smaller welfare state:

People abuse the system and don't want to work.  If they had no other choice but to work, they'd find a job.  If people sincerely can't get a job, we retrain them and they'll be able to get one then.



The theory that lies beneath all the rhetoric is human capital.  Wages are no long subsistence wages, as early economists theorized, but they are a return to our skills, talents, and hard work.  This theory along with the assumption that jobs are always available is what makes these narratives believable. 


It is the assumption that jobs are always available I'd like to explore.  There are many measures of unemployment, but there are two in particular that could help shed light on this question: the Beveridge ratio* and the inverse of the Beveridge ratio.  The Beveridge ratio is the ratio of job openings to number of unemployed people.  The inverse is well, the inverse. 

A good Beveridge ratio (for the worker) would be 1 or higher since a number higher than one would mean there is more than one job opening for every unemployed person.

A good inverse Beveridge ratio would be less than 1, meaning for every 1 unemployed person, there's more than one job opening

Using FRED and JOLT series:

Civilian Labor Force (CLF16OV), Thousands of Persons, Monthly, Seasonally Adjusted
Civilian Employment (CE16OV), Thousands of Persons, Monthly, Seasonally Adjusted
Job Openings: Total Nonfarm (JTSJOL), Level in Thousands, Monthly, Seasonally Adjusted

I first calculated the unemployment level by subtracting the employed level from the labor force.  Then constructed the ratio and the inverse for the years 2000-12 to 2013-12.  Unfortunately the JOLTS job opening series doesn't go back further than 2000-12.

As you can see, the Beveridge ratio (for this times series) never even reaches one and the inverse then obviously can never drop below one. 

These measure are conservative because they do no include marginally attached or part-time workers who would like full-time jobs. 

The point here is that we assume jobs are just floating around unfilled because people are too lazy to work, too unmotivated, or too discouraged by the welfare they receive.  Why don't we check our assumptions?  Because if I have calculated everything right (which I may not have so I encourage you to check) it seems that there aren't enough jobs to go around.  Hence, the narratives to get a job or get skills or an education fall apart. 


*The Beveridge ratio is a term my past professor at Roosevelt used and I think I remember him saying, no one else really calls it by that name.